Landlords renting to those on housing benefit will find it harder to secure a new mortgage after Nationwide said it would no longer issue buy-to-let loans for properties with local authority tenants.

The change comes ahead of benefit reforms due for April that will cap the overall amount someone can claim from the state to £350 a week, or £500 for those with children. This has the potential to reduce housing benefit payments because the housing element will the first benefit to be reduced if claimants are exceeding the new limits.

Nationwide, which via its Buy-to-let specialist business The Mortgage Works is the UK's largest lender to landlords with tenants on housing benefit, clarified its terms quietly at the end of last year so that applicants with local authority tenants would no longer be accepted.

Policy change: The building society was the largest lender of buy-to-let mortgages to landlords with housing benefit tenants

A spokesman said: 'The Mortgage Works' policy concerning tenants in receipt of housing benefit is consistent with that of many other mainstream BTL mortgage providers. We simply took the opportunity last year to clarify our policy.

'We continually review our lending criteria and we are committed to working alongside key market stakeholders to support the BTL sector.'

The Mortgage Works would not say if its policy change was influenced by the changes to benefits that are designed to cut the welfare bill and push people into work.

The change only applies to new buy-to-let borrowers and The Mortgage Works will continue to remortgage its existing customers if they have tenants on benefits, based on their history of rental payments.

The Mortgage Works accounts for around 20 per cent of buy-to-let lending overall and it is the largest lender to landlords with tenants on housing benefit.

There are 1.66million housing benefit claimants who live in private rented accommodation. The number of properties they occupy is lower, thought to be around 1million, as more than one claimant may live together.

The cap to claimants total benefits that arrives in April precedes the shift to one 'universal credit' in October. The cap means that claimants could be forced to move to a smaller house, or a cheaper area, because their benefit payments no longer provide enough to cover rent and living costs.

Benefits will be capped at £350 a week per person, or £500 for families. An individual claiming the maximum amount for single person would get £18,200 a year in handouts - equivalent to a salary of more than £23,000.

Concern had been raised that bringing all handouts together as one payment would prevent housing benefit being paid directly to landlords, as happens currently in a minority of cases. Where a tenant has a history of arrears local authorities can pay the benefit direct to their landlord.

Landlord groups had lobbied for that process to be retained under the new system.

David Cox, senior policy officer at the National Landlords Association, said: 'There had been a concern about universal benefit but recent alternative payment arrangements have been announced that clarify the position. They confirm that the housing element will still be able to be paid direct to landlords where that is justified.

'It is possible lenders have taken these decisions before these alternative arrangements were confirmed.'

Chief executive Campbell Robb said: 'Lenders adopting or promoting these sorts of policies is likely to make the pool of potential homes available to housing benefit tenants even smaller. We would expect the result of this would be families forced to move away from jobs, schools or support networks, to overcrowd or to live in appalling conditions.

'We urge any lender looking at such measures to consider the huge and damaging impact they can have on the lives of families across the country. In addition the government must take a lead on stopping this kind of discrimination by addressing landlord and lender concerns surrounding housing benefit and the introduction of Universal Credit.'